Focus on US consumers as retailers prepare earnings
New York: Wall Street will get a close look at how American consumers are faring in the early days of president Donald Trump's tariff regime when the biggest US retailers like Walmart Inc and Target Corp report earnings this week.
Consumer spending accounts for roughly two-thirds of America's gross domestic product.
Over the past few years, its resilience has also helped power the S&P 500 Index to record after record. And that appears to be continuing, with retail sales rising in July after posting upwardly revised gains in June.
What investors need to know is how long consumers can hold on with the Trump administration's trade wars, weak job growth and sticky inflation. Consumer sentiment dropped this month and inflation expectations rose, according to preliminary data from the University of Michigan released last Friday.
So the earnings reports and forward outlooks from Walmart and Target, as well as Home Depot Inc and Lowe's Companies Inc, will give the market a valuable read on how economic conditions are affecting consumers and the places they shop.
'These reports are going to be very important,' said Keith Lerner, co-chief investment officer at Truist Advisory Services. 'The question that Wall Street and investors are trying to figure out is: We see the tariff numbers going up, are they being passed through, or are the companies' profit margins getting squeezed?'
More than 90% of S&P 500 companies have reported their results this earnings season. They're on track for an eighth-straight quarter of growth, with profits estimated to climb by nearly 11% – more than triple the preseason estimate, according to data compiled by Bloomberg Intelligence.
But a bunch of major retailers have yet to release results, meaning there's still some key data coming on where the economy and stock market are headed. Home Depot reports tomorrow, followed by Target, Lowe's and Estee Lauder Companies Inc on Wednesday, and then Walmart on Thursday.
Best Buy Co Inc, Dick's Sporting Goods Inc and Kohl's Corp hit the following week, by which time the consumer picture should be far clearer.
'Consumer spending growth has slowed from last year but continues to grow at a moderate pace,' Morgan Stanley economists led by US chief Michael Gapen wrote in a note to clients last Friday.
'We expect spending to weaken more later this quarter and in the fourth quarter as price increases from tariffs weigh on consumer purchasing power.'
For example, Tapestry Inc has been one of the stars of the retail world, with its shares soaring more than 50% this year after last year's 77% climb.
But investors dumped the stock last Thursday as it tumbled 16%, its biggest drop in two years, after the company said that weakness at its Kate Spade brand and rising tariff costs would weigh on its bottom line. — Bloomberg
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